Kosovo Economic Problems

By | May 28, 2021

Structural problems

Despite the substantial annual GDP growth and the euroization of the economy, the Kosovar economy suffers from a number of serious structural problems. Overall, the EU Commission certified Kosovo in its 2019 progress report that it was “in an early phase of development towards a functioning market economy”. The extreme trade deficit makes Kosovo’s economy highly dependent on domestic consumption based on excessive public sector salaries and remittances from the diaspora.

Unfortunately, the Kosovar economy has an inadequate infrastructure. While there have been significant improvements in the transport infrastructure in recent years, especially with the expansion of the motorway network, the unstable energy supply continues to represent a serious development problem.

A central problem is the political instability with frequent changes of government and a lack of development-oriented economic policy – a structural problem in the entire Western Balkans. The economic system has clear characteristics of political patronage, with the dominance of the public sector. On the one hand, this includes public administration, in which extremely high salaries are paid based on a party-politically motivated personnel policy, and, on the other hand, inefficient, politically controlled public companies with slow progress in privatization.

In addition, there is a weak constitutional state with a weak and politicized judiciary and police, partly still unclear property relations due to the war, the lack of economic control over parts of Kosovar territory, primarily the four predominantly Serbian communities in the north, and the problem of rampant, systematic problems Corruption.

Against this background, a substantial informal economic sector continues to flourish, which subverts market economy rules, undermines workers’ rights and the welfare state. The EU Commission estimated the share of the shadow economy in the gross national product at 30% in 2019.

The underdeveloped social systems represent a further structural problem. Social, politically motivated transfer payments to privileged groups such as war veterans instead of to needy social groups such as the poor miss the goal of social assistance, promote economic inactivity and pose a significant threat to fiscal stability. Underdeveloped is also health care; so there is still no public health insurance in Kosovo to this day.

According to PHYSICSCAT, the public education system remains in need of reform, not least because, as in most of the former Yugoslavia, it has not been adapted to the needs of the market. One of the central, traditional socio-economic structural problems in Kosovo remains the extremely high level of unemployment and its distribution. The number of unemployed at the end of 2019 was around 130,300. The unemployment rate was the Labor Force Survey 2019 according to the fourth quarter of 2019 at 25.9%. The labor market in Kosovo is characterized by low labor force participation (employment rate at the end of 2019: 30.7%), a high level of long-term unemployment (over 70% of all unemployed) and youth unemployment (youth unemployment rate 2019, Q4: 49.1%) as well as considerable Gender disparities (female employment rate 2016, Q4: 22.4%, compared to a male employment rate of 60.2%). In Kosovo, however, there is a very extensive informal sector that is not covered by the statistics. B. includes the majority of women who work in subsistence farms in the agricultural sector. The consequences of informality are a loss of income from social security contributions and a lack of social and labor law protection for employees. There is no state unemployment insurance in Kosovo. Every year around 36,000 young jobseekers enter the labor market, of whom only a small proportion can be absorbed. For the vast majority, one of the following options therefore remains: (further) training and further education, university studies, unemployment, informal employment or migration. Estimates assume that an average annual growth in gross domestic product of 4.7% would be necessary to keep the unemployment rate constant. Approx. a third of all young Kosovars do not have any education, training or employment. The employers complain that the level of training of young Kosovars does not meet the needs of companies for qualified workers.

Another problem is that the economic and social statistical data are still incomplete and partly of poor quality, which affects both the assessment of effective economic development and economic and social policy planning.

Kosovo Subsistence farming

Economic effects of the corona pandemic

The spread of the pandemic to Kosovo in the 2nd quarter of 2020 will have a massive impact on the economy of the country in 2020. The national and international measures taken to contain the crisis have a negative impact on tourism, experts, transfers from the diaspora and direct foreign investment. Externally it is the travel restrictions and border closings as well as the global recession, internally the restriction of freedom of movement and the closure of a large part of the economy that have a negative economic impact. This particularly affects the most dynamic sectors, trade. Hospitality, Industry, Construction, and Agriculture. While the forecasts for economic growth at the beginning of 2020 were still 3.5% GDP, the IMF now expects a recession of 5.0%. In tourism, exports or the salaries of Kosovar seasonal workers abroad, the fund calculates a decrease of between 17 and 20%, in the case of the very important transfer payments from the diaspora by 10%. A decrease in tax revenue of 12% is expected. 56% of shops had to close temporarily and the number of registered unemployed increased five-fold between January and April compared to the previous year.

Beginning in March, the Kosovar government adopted a comprehensive package of aid measures to cushion the socio-economic consequences of the pandemic, totaling 2.5% of GDP: transfer payments to companies, the payment of social security contributions for employees in certain companies, the payment of unemployment benefits and increased amounts of social assistance for the socially disadvantaged and wage supplements for police officers and employees in the health sector. International donors have pledged extensive financial aid to Kosovo: EUR 100 million from the EU and EUR 50 million from the IMF in inexpensive emergency loans to finance the increased health care costs and to close the budget gaps.

At the beginning of July, the forecasts for economic development looked mixed: a recession of 4.4 percent of gross domestic product (GDP) was expected for 2020, but an increase of 4.0 percent for 2012. For imports, private consumption and investments, a value was forecast for 2021 that was overall slightly above the 2020 slump. The economic framework was made more complicated by the tumultuous change of government at the beginning of June 2020 as well as the dramatic increase in the number of infections since then and the subsequent renewed restrictions in public and economic life.

In autumn 2020, most institutes assumed a 5% decline in GDP and strong growth of 7.5% in 2021. In June 2020, the Hoti government passed an economic recovery program for 2020-21 worth 365 million euros. The main focuses of the program are: citizens can withdraw 10% of the contributions they have paid into the pension fund for 4 months; Employment promotion measures; financial support for companies as well as tax breaks. The move to provide temporary access to the pension fund has received mixed responses met. On the one hand it was welcomed that the measure could promote economic growth, on the other hand it was objected that the parts of the population suffering most from the consequences of the pandemic will not benefit because they have so far been able to pay little into the fund.